The novelist Thomas Pynchon said something worth remembering when we find ourselves arguing about whether, as the Trump administration claims, trickle-down tax cuts will pay for themselves:
“If they can get you asking the wrong questions, they don’t have to worry about answers.”
No credible analyst would claim that growth effects from tax cuts come anywhere close to offsetting their cost. There’s no consistent correlation between growth, productivity or investment and changes in tax rates over time or between countries. That’s not to say tax cuts never have any effect on growth (the effects, for the record, can go either way; a new, authoritative analysis of House Republicans’ latest trickle-down tax cut proposal finds, for instance, that its “estimated output effects appear to be limited in size and possibly negative”). But the historical evidence provides no basis for the kinds of claims we’re hearing from team Trump.
We don’t have to look only to history, though. There’s a real-time, trickle-down experiment ongoing in Kansas, one designed by the same folks behind the Trump plan.
In 2012, Kansas Gov. Sam Brownback signed a bill that, among other things, substantially cut the state’s top tax rate and exempted “pass-through” business income from taxation (President Trump’s tax plan includes a similar loophole). The architects of Brownback’s plan predicted that it would provide an “immediate and lasting boost” to the state’s economy.
They were wrong. Real GDP growth in Kansas since the fourth quarter of 2012 (Brownback’s cuts took effect in January 2013) has been relatively slow, at 6.1 percent through the third quarter of 2016. That’s about three-fourths of U.S. GDP growth over that same period (8.3 percent). A similar story holds for private employment growth: 5.0 percent in Kansas between December 2012 and March 2017, 9.1 percent in the U.S. overall. Relative to its neighboring states, Kansas is no standout, either; on these indicators, it’s doing worse than Colorado, Missouri and Nebraska, though better than Oklahoma (another big tax cutter).
Again, that doesn’t mean economies can’t grow after tax cuts. But what you can be sure of, regardless of which way growth bounces, is revenue losses.
Kansas lost $472 million from the pass-through loophole in 2014 alone, and general fund revenue in 2016 was $570 million (0.4 percent of state GDP) below 2013 levels. Casualties of the reduced revenue have included the state’s transportation projects, some of which have been indefinitely postponed, and funding for K-12 and higher education. The state’s bond rating has been downgraded twice, in 2014 and in 2016.
As the table below summarizes (see here for more details), Kansas’s experience puts the lie of the tax cutters’ claims on full display.
Neither Brownback nor the folks who designed his plan will acknowledge their mistake — the governor recently vetoed a reversal of the cuts, and his old advisers were back to touting the same old fairy dust in support of the Trump plan only a couple of weeks ago.
The purveyors of such plans must give each other high-fives every time they see us arguing growth effects. That way, we’re not talking about how much of the cuts flow to the richest Americans. In the case of Trump’s previous plan, about half of the cuts went to millionaires. The recent plan from House Republicans was even more skewed.
So, in the spirit of Pynchon’s warning, from here on in, when someone says “growth effects,” let’s just say “Kansas.” And move on to what’s really going on here.